Planning for tax saving investments for FY 2026? Check the latest taxation rules for ULIPs, EPF, and ELSS mutual funds

For the better part of a decade, the investment playbook for a salaried Indian typically looked like this: park money in EPF for retirement, buy a ULIP for insurance-plus-investment, and put the rest into mutual funds.

Each product came with its own tax story. However, the government has been gradually shifting toward taxing investment returns more consistently, regardless of the product they come from.

Whether you're reviewing an existing portfolio or making fresh investment decisions, it’s crucial for you to grasp where things now stand. Let’s see how these three popular long-term investment products are taxed nowadays.

2026 investment product tax snapshot: ULIP, EPF, Mutual funds

Product	When is it tax-free?	When is it taxed?
ULIP	Premium ≤ ₹2.5 lakh/year (post Feb 2021)	Premium > ₹2.5 lakh; STCG 20%, LTCG 12.5%
EPF	After 5 years of continuous service	Before 5 years; slab rate applies
Equity Mutual Fund	LTCG up to ₹1.25 lakh/year	STCG 20%, LTCG 12.5% above ₹1.25L
Debt Mutual Fund	—	Always taxed at slab rate (post Apr 2023)
Equity Linked Savings Scheme (MF)	LTCG up to ₹1.25 lakh/year (After 3 years lock-in)	LTCG 12.5% above ₹1.25L

How ULIPs are taxed in 2026: ₹2.5 lakh premium threshold

For years, ULIPs held a uniquely privileged position in the tax code. Premiums qualified for an 80C deduction, returns compounded tax-free inside the policy, and the maturity amount was tax exempt.

In 2012, the government capped the premium-to-sum-assured ratio at 10% to qualify for tax exemption. For example, if your annual premium is ₹10,000, the sum assured must be at least ₹1,00,000 for the policy to qualify for tax exemption.

But a more significant shift came with the Finance Act of 2021.
For any ULIP issued on or after February 1, 2021, you will no longer get the tax exemption on maturity proceeds if the annual premium, across all the ULIPs you hold, is more than ₹2.5 lakh in any year during the policy term.

"If a person pays premiums for more than one ULIP issued on or after February 1, 2021, the tax exemption applies only to those ULIPs where the aggregate amount of premium does not exceed ₹2,50,000 in any of the previous years during the term of any of those policies,” explains Mihir Tanna, Associate Director – Direct Tax, SK Patodia & Associates.

For policies that cross this threshold, the maturity proceeds are taxed as capital gains and treated on par with equity-oriented mutual funds, provided the ULIP invests at least 65% in domestic equities. That means a 12-month holding period determines whether gains are short-term or long-term.

Gains on policies that you hold beyond a year are taxed at 12.5% on amounts over ₹1.25 lakh. Policies redeemed within 12 months attract a flat 20%. The tax is calculated on the net gain i.e. premiums paid are deducted from the amount received before arriving at the taxable figure.
One silver lining, death benefits are still fully exempt from tax, with no premium limit applied.

If you are an investor under the Old Tax Regime, premiums up to ₹1.5 lakh remain eligible for an 80C deduction but with a condition. If you exit the policy before five years, those deductions get reversed, becoming taxable in the year of surrender.

EPF taxation in 2026: 5-year withdrawal rule and new tax regime changes

EPF has always been one of the most stable instruments in the Indian investor's toolkit: government-backed, employer-matched, and compounding in the background.

The fundamental rule remains unchanged: If you withdraw after completing five years or more of continuous service, you get the entire corpus completely tax-free.

However, 2021 introduced amendments that put a ceiling for high-income contributors. If an employee's own contribution to EPF in a financial year exceeds ₹2.5 lakh, the interest earned on the excess becomes taxable. The logic is that the EPF''s tax-free status was designed as a retirement benefit, not as an investment vehicle for those contributing large sums.

"If service terminates because of the employee's ill health, the contraction or discontinuance of the employer's business, or other cause beyond the employee's control, the five-year limit will not apply," adds Tanna.

In other words, the tax on early withdrawal is tied to voluntary exit, not to circumstances outside the employee's control.
The more significant shift for most salaried investors has come through the New Tax Regime, which has now become the default for individuals. Under it, the Section 80C deduction on employee EPF contributions is no longer available. This changes the calculus somewhat.

"Under the new regime, you cannot claim the 80C deduction for your EPF contribution. That is the main loss. However, employer contribution remains tax-free within overall limits, and withdrawal after 5 years is still tax-free. So EPF still remains a good long-term, tax-efficient retirement product," says CA Abhishek Soni, CEO and Co-Founder, Tax2win.

Mutual fund LTCG tax rules in 2026: How ELSS is taxed

A fund that invests at least 65% of its assets in listed domestic equities qualifies as equity-oriented mutual fund. If you hold such a fund for more than 12 months, then gains up to Rs 1.25 lakh are exempted from income tax in a given financial year. However, any gains above ₹1.25 lakh are taxed at 12.5% as long-term capital gains. If you hold the fund for 12 months or less then it will be treated as short term capital gain and the rate is 20%.

"When you invest in an equity-oriented mutual fund for the long run, risk and return increase; however, tax outflows reduce from 20% to 12.5%, which matches the government's aim for long-term savings," says Tanna.

Equity Linked Savings Schemes (ELSS) are a type of mutual fund scheme that gives you income deduction benefits under Section 80C on investment up to Rs 1.5 lakh in any given financial year. However, it comes with a lock-in period of 3 years. However, any gains made from ELSS are subject to overall equity mutual funds taxation as explained above.

Debt funds, however, are a different story. Before April 1, 2023, debt mutual funds enjoyed a meaningful tax advantage. Long-term gains, on units held for more than three years, were taxed at 20% with indexation, which significantly reduced the effective tax outgo and made debt funds clearly preferable to bank fixed deposits on an after-tax basis.

That advantage no longer exists for new investments. If you purchased any debt fund units on or after April 1, 2023, your gains are taxed at the investor's income tax slab rate, regardless of the holding period. The concept of long-term capital gains (LTCG) for these investments, has been effectively removed. A debt fund and a bank fixed deposit now sit at tax parity for new investors.

"Gains from debt mutual funds are taxed at slab rate, so tax depends on your income bracket," says Soni.

One planning tool that applies across all mutual fund investments: capital losses can be used to offset gains. Short-term losses can be set against both short-term and long-term gains. Long-term losses can only be set against long-term gains. Any unused losses can be carried forward for up to eight years but only if the income tax return is filed on time.

"Short-term capital loss can be adjusted against both short-term and long-term gains. Long-term capital loss can be adjusted only against long-term gains. If losses remain, they can be carried forward for 8 years, provided you file your return on time," Soni notes.

The government has, over time, tried to narrow the gap between how different investment products are taxed. What remains is a framework that broadly rewards long-term holding in equity-oriented investments, while treating shorter-term or fixed-income returns more like regular income.

For investors reviewing their portfolios in 2026, the starting point is simpler than it used to be: understand what you own, check which tax rules apply to it today, not when you bought it and plan around the rules as they stand.